Regulatory change: Challenges continue, but opportunities exist

Posted by Irena Gecas-McCarthy, Advisory Principal, Deloitte & Touche LLP, Chris Spoth, Advisory Managing Director, Deloitte & Touche LLP, David Wright, Advisory Managing Director, Deloitte & Touche LLP, Monica Lalani, Advisory Principal, Deloitte & Touche LLP Ken Lamar, Independent Senior Advisor to Deloitte & Touche LLP, Richard Rosenthal, Advisory Senior Manager, Deloitte & Touche LLP, and Alex LePore, Advisory Senior Consultant, Deloitte & Touche LLP on August 30, 2016


Regulators have consistently communicated their high expectations for large foreign banking organizations (FBOs) operating in the US.  Underlying these expectations is the assumption that FBOs will understand, appropriately respond to, and comply with regulations and guidance affecting the totality of their US operations, now in the forms of Intermediate Holding Companies (IHCs) and US branches and agencies.  To have sufficient time to respond to, and integrate, new requirements, FBOs should gain an early understanding of new regulatory developments at the proposal stage, evaluate their impact on US operations, comment, and, when finalized, shift to an implementation mode that builds and integrates these new capabilities into business-as-usual operations.

Large FBOs, in particular, are already subject to recovery and resolution planning (RRP), liquidity reporting, liquidity stress testing, governance, and risk management requirements, among others, and are expected to holistically meet regulatory reporting, capital planning, and stress testing requirements.  The Federal Reserve Board’s (FRB) final rule1 establishing enhanced prudential standards significantly raised the stakes for FBOs to effectively meet regulatory requirements.

What sometimes goes unnoticed is the large universe of proposed regulations and supervisory guidance issued to support implementation of these regulations.  Together, they comprise a complex set of interconnected and ever-increasing implementation requirements for institutions to track, analyze, implement, and monitor.  Because of the complexity of these requirements, FBOs should use a dynamic, cross-functional, and proactive approach to understanding the relevance and impact of regulatory change.  Most significantly, they should drive that change end-to-end within the organization.

Complicating matters for the FBOs is that their parents and affiliates have their own competing demands on resources, time, and capabilities from their home country.  Although large FBOs have worked diligently to establish their IHCs and come into compliance with the enhanced prudential standards, there remains much work to do.  Refer to the prior installments of our FBO series for additional information.For a chart detailing the status of key US regulations for FBOs, please click here.

Three focus areas for regulatory change management

FBOs, and their regulatory change management functions, should consider the following when responding to continued challenges:

(1) Operationalizing and achieving compliance with previously finalized rules and expectations

FBOs must be ready to operationalize several previously finalized rules that will soon become effective, including those relating to capital planning, the leverage ratio requirement for IHCs, new resolution planning guidance, and regulatory reporting requirements.   To implement these, each FBO will need to drive change and accountability through its “Three Lines of Defense” and throughout the US, home country, and affiliated operations.

(2) Understanding the immediate regulatory landscape and putting in place a sustainable operating model for US operations

Among other things, FBOs should take the following steps:

  • Assess currently proposed or finalized rules (e.g., regulations governing long-term debt and single counterparty credit limits, restrictions on incentive-based compensation arrangements, and regulatory reporting requirements)
  • Remain aware of, and begin preparation for, forthcoming proposals (e.g., short- and long-term liquidity standards, restrictions on affiliate transactions, and a new leverage ratio requirement for broker-dealer subsidiaries)
  • Understand supervisory guidance issued across regulatory agencies (both banking and securities), as implications cut across corporate, investment banking, and retail businesses

A comprehensive operating model (with specific roles and responsibilities that go beyond compliance functions) should be in place to process, assess, and respond to these changes. More often than not, such changes require risk, finance, and business line functions to own and implement new requirements, sometimes in a highly collaborative fashion.  To support this operating model, firms should integrate new regulations into existing project management infrastructures to ensure compliance and efficiency.  Defining owners for proposed new requirements at an early stage is a central aspect of this process.  It also becomes critical for an FBO to align its strategy with respect to its US operations with the organization’s overall strategy at the parent level.

(3) Integrating regulatory change and compliance management

While the challenge may seem daunting, it also presents an opportunity for FBOs to enhance their integration of regulatory change and compliance management to give themselves a strong competitive advantage.  Given the interconnectedness among these regulations, FBOs should recognize that approaching regulatory change and compliance management from an end-to-end perspective provides the opportunity to rationalize and integrate new capabilities more efficiently.

It is critical to evaluate how legacy Compliance, Governance, Regulatory Affairs, Regulatory Relationship/Liaison, and related functions currently connect to “run-the-bank” activities and how their work could be better streamlined and coordinated.  In addition, a more sustainable and strategic regulatory program that provides a capability-level understanding of applicable regulations is key to increasing efficiency and reducing compliance-related risks.  Such an approach will center on how an institution can incorporate regulatory change into business-as-usual practices and run its business in the medium- and long-term, rather than simply reacting to any given regulation on an ad-hoc basis.

The need to address interconnections and dependencies of new rules

Explaining to stakeholders how pending regulatory proposals interconnect and impact firms can lead to more holistic solutions and better prepare organizations to deal with transformative new regulations.  For example, building the new Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) as a joint initiative can provide a more efficient response and improve overall liquidity risk management capabilities.

Staying the course

Finally, as FBOs and their IHCs continue to prepare for final rules with fast-approaching effective dates, such as the FRB’s annual Comprehensive Capital Analysis and Review (CCAR) program and related stress tests, the advantages of a holistic strategy are evident.

For example, in the case of the CCAR and stress testing program, FBOs should be aware of expected changes to the existing regulations, such as the inclusion of the supplementary leverage ratio (SLR) requirement for large banks in 2017.  FBOs should closely monitor this development—as well as other potential changes to the rules governing capital planning and stress testing—as they continue to enhance their systems and processes in preparation to enter the programs next year.

Similarly, FBOs should take a diligent approach to operationalizing resolution planning and regulatory reporting requirements, for which final rules are already in place.  Regulatory expectations in these two areas continue to intensify, and the regulatory change function should actively engage with ongoing developments.  Particularly in the resolution planning space—where regulators have recently issued updated guidance for US BHCs, and expressed their intent3 to issue further guidance for large FBOs—an integrated approach by the US operations is crucial.

To assist FBOs to achieve this goal, a more strategic approach to regulatory change management is required.  FBOs should not just consider how Compliance, Regulatory Affairs, and other regulatory change functions changes interact, but should develop holistic strategies to regulatory change and management of these key projects.  A strategic regulatory function could be uniquely positioned to analyze and digest new developments, and provide insights to various functions within an FBO that will drive how compliance resources are deployed.  It can provide proactive monitoring to assist the CEO and front office to deploy these resources in response to regulatory change and actively integrate into business and strategic planning, using both internal and public data.  Not only can this approach help FBOs to respond to current proposals, forthcoming proposals, and finalized rules in a more effective and holistic manner, it can also generate increased resiliency, cost efficiencies, and reduce deficiencies identified by regulators.

Deloitte Advisory is developing a larger Point of View (POV) on the Strategic Regulatory Officer role/function and a proposed approach to managing regulatory change.  For more details on this POV and our solution to help address these challenges, please contact us.

1Federal Reserve System, “Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking Organizations,” 79. Fed. Reg. 17240, (March 27, 2014), available at
2For the first three posts in our FBO series, please see “Enhanced Prudential Standards for Foreign Banks: What’s after the compliance deadline?,” available at, “Evaluating global booking models after the Brexit,” available at, and “Marketplace transparency and reporting readiness,” available at
3Federal Reserve System, Federal Deposit Insurance Corporation, “Agencies Extend Deadline for Certain Foreign Banking Organizations’ Resolution Plan Submissions,” (June 8, 2016), available at


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